Time is the scarce resource! The merger between Honda Motor Co., Ltd. Sponsored ADR (HMC.US) and Nissan cannot enhance competitiveness in the short term.

Honda Motor Co., Ltd. Sponsored ADR (HMC.US) and Nissan Motor Co. expect that the merged global third-largest automotive group will bring huge benefits, but intense competition from China makes people doubt whether they can complete the merger in a timely manner. The two Japanese automakers announced on Monday that they have agreed to begin formal negotiations on the merger. While the outcome of the deal is still uncertain and partly depends on Nissan's progress in turning its losses into profits, the goal is to complete the transaction by August 2026. Nissan's primary partner Mitsubishi Motors will decide whether to participate by next month. The goal of the two automakers is to achieve synergies of over 1 trillion yen ($64 billion) through shared platforms, joint development, and combined purchasing. They aim to increase operating profits to over 3 trillion yen, a 54% increase from last year's combined performance. However, Honda CEO Toshihiro Mibe stated at a press conference on Monday that the full effect of synergies may not be felt until after 2030. He said that by that time, these companies need to establish the ability to compete with Chinese rivals, or else they will face being "defeated". Analysts question whether they have that much time. One of the biggest obstacles the two companies currently face may be their vehicle lineup. Both companies are not strong in the electric vehicle field. While Nissan was an early pioneer of the Leaf, it has since struggled. A new electric vehicle called the Ariya, intended to challenge Tesla, Inc.'s Model Y, has been hindered by production issues. Honda is more focused on hybrid vehicles and does not sell these types of vehicles in the US, where demand for them is rising. Morningstar senior analyst Vincent Sun stated, "Both companies lack compelling electric vehicle products, and the new entity post-merger will still face challenges in new electric vehicle model and technology development." Standardized vehicle platforms will generate cost synergies, but this also takes time to develop. Sun stated, "Fixing the business may take longer than anticipated." Losing ground in the Chinese market In China, as the shift to electric vehicles continues, consumer interest is focused on software-driven features and digital experiences inside the car, areas where Chinese manufacturers excel. BYD Company Limited and other domestic brands have surpassed traditional automakers, launching electric and hybrid vehicles with Innovative Solutions and Support, Inc. Honda and Nissan have lost ground in this global largest automotive market. Honda announced a 15% decline in quarterly profits last month and has been reducing its workforce in China. Nissan has announced plans to cut 9,000 jobs globally and reduce capacity by 20% due to declining sales in China and the US. Moody's Corporation senior analyst Dean Enjo wrote in a report to clients that to reverse their significant business in China, the companies will face "significant execution risks". Both automakers also have a focus on the US and Japan. Enjo stated, "Significant overlaps" mean the merger will not bring significant benefits in terms of geographic diversification. However, Enjo stated that this integration can help them withstand any potential impacts of the incoming US President Trump's import tariffs. Big deal Honda is the second-largest automaker in Japan and Nissan is the third-largest. After the merger, they will become the third-largest global automotive sales group, after Toyota and Volkswagen. This merger will also be the largest restructuring in the global automotive industry since Fiat Chrysler Automobiles and PSA merged to create Stellantis for $52 billion in 2021. The scale of this deal highlights the threat from Chinese competitors, especially as they have been entering regions where Japanese automakers once dominated, such as Southeast Asia. For Japan, the threat to the automotive industry is a threat to its economic lifeblood, as Japan's influence in key industries like consumer electronics and chips has been weakening for years. Analysts at Morgan Stanley said in a report earlier this month that technological challenges mean that traditional automakers who do not find new partners could become smaller companies, with higher capital expenditures and research and development costs per vehicle. They said, "Given industry dynamics, more consolidation may be on the horizon."